analysis

BMS market takes first step with FTSE4Good

February 2014

The market for breast milk substitutes is a highly contentious ethical area, especially for investors. The FTSE4Good criteria for the category – launched last year – is an attempt to build industry dialogue. Does it represent a giant leap or a just a baby step, asks Liz Jones

When it comes to ethical investment, breast milk substitutes (BMS) have been a contentious issue. Even defining what a BMS is can be problematic.

David Harris, director FTSE ESG, explains that for the past three decades industry’s definition of what constitutes a BMS product has been at odds with that of NGOs: “What are breast milk substitutes? Infant formula? Yes. But what about baby juices, baby cereal, and most controversial of all follow on milks? All of these products could be regarded as substitutes or supplements for breast milk, it depends how they are used. Some NGOs have set out that the infant formula industry created the follow on category to get around the provisions of the WHO Code.”

NGOs and the baby milk industry have been in conflict over the issue of breast milk substitute marketing for over 30 years. The difficulty therefore in establishing worthwhile collaborations between industry and NGOs around child nutrition “have been nigh on impossible and the cause of much frustration among major global health and development foundations”, says Harris.

Part of the sector’s controversy lies in the fact that it is a highly emotional category. In the past there has been questionable infant formula marketing in some countries which led to women buying formula they couldn’t afford, not making it up properly, using dirty water and some babies ultimately dying as a result.

Dominic Schofield, director of Multinutrient Supplements Initiative at Global Alliance for Improved Nutrition (GAIN), agrees. “There’s been a bad history. Companies haven’t met international standards for ethics. As an overlay on that there’s a tangle of ideological issues. People’s views differ – some see the need for a patronistic approach via government, others don’t. There has been a lot of effort and acrimony between all the interested stakeholders.”

The point of departure, he says, is that it is important to both promote and protect the need to breastfeed. But there are lots of issues that make it difficult for breastfeeding to be an option and on top of that there is the fact that alternatives to breastfeeding are promoted and that can have an impact on infant health. “Marketing needs to be limited so that there is no negative impact,” Schofield maintains.

The ongoing stand off on BMS has meant that for a long time no official body has been prepared to try and build any middle ground in fear of being shot down. That changed last year when FTSE stepped into the breach with a new set of criteria to identify best practice for companies and their approach to BMS marketing.

Setting standards
Most BMS companies work to the WHO code of practice. But as Harris points out, it is interpreted by NGO and companies in different ways. Similarly some governments implement it, some don’t. The basis for FTSE’s criteria is the contentious dilemma of what constitutes a BMS product. For FTSE it is infant formula and complimentary foods if marketed for babies under six months as well as follow on milk marketed to babies up to 12 months old. “ “Because there are different views, we have created a standard that many would view as going beyond the code especially in higher risk countries,” said Harris.

So far, only one company out of the big five manufacturers – Nestlé – has met the criteria – which has been independently verified by external third party agencies in four countries.

Janet Voûte, global head of public affairs at Nestlé emphasizes the company’s full support for the WHO code. “It is a sensitive area because you’re dealing with serious nutritional issues. Nestle is fully supportive of the 6 months breastfeeding line and we want to underline that. Breast milk is best. Infant formula is for women who can’t or choose not to breastfeed. You have to understand that the WHO code was issued to member states and what is regrettable from all sides is that fewer than 40 states enacted legislation. The challenge that has arisen from that is that there are various interpretations and that leads to confusion.”

Voûte believes that the FTSE4Good Index and the inclusion of their criteria and the transparent sharing is the beginning. “You do see an evolution in the dialogue and it’s improving. Ideally, FTSE4Good helps raise the industry standard. Other companies will apply for inclusion and standards will rise… However, it’s not an end in itself.”

Voûte believes that transparency is key to the FTSE4Good process. “It’s the only way forward,” she said.
It’s not an unusual process for Nestlé either. As a company, it is the way it now approaches business. For example, in the responsible sourcing of palm oil and the issue of child labour in the cocoa supply chain.

As a business, Nestlé convenes with shareholders including NGOs regularly to discuss issues and problems. It’s all to do with its vision of Shared Values. “We sit down together and talk about issues and their solutions,” she said.

A recent example of this was a meeting with Oxfam which led – in the last 6 months – to Nestlé signing up to the Women’s Empowerment Principles. “This is an example of where direct dialogue can give results and result in change,” said Voûte.

While many companies publish summaries of such verifications (like Apple, Gap and Nike on supply chain labour), most are loath to publish them ‘warts and all’. As part of the FTSE4Good criteria, verifications are published in full. “It’s a big step for a company to allow third party verification of their practices and then for it to be published in full,” said Harris.

This is being done to try and build trust and dialogue between parties on what the key issues are and how to make progress in this complex and difficult area.

While Nestlé has received inclusion on the index, the report does highlight grey areas where there is room for improvement. In Nestlé’s case, third tier distribution is an area flagged for improvement. Some supermarket promotional displays go against the code despite Nestlé trying to educate their distribution chain covering 10,000s of distributors and retailers. “It’s a massive job,” agrees Harris.

Changing attitudes
Harris does see attitudes changing. Indeed in late October 2013 FTSE4Good hosted a BMS workshop bringing together some child health and nutrition NGOs together with Nestlé for the first time. It was the first time they had sat down together. This was a direct result of Nestlé receiving FTSE4Good verification and winning inclusion to the index.

FTSE is in dialogue with all the major BMS manufacturers. The index is reviewed twice a year – the next time is next month (March 2014) - and while Harris can’t say anything, another BMS company is very close to securing inclusion.

More companies on the index is a must. Schofield comments: “More than one company has to get onto the index. Some companies have improved their practices and dialogue has opened up. FTSE has created a vehicle for engagement and that is good for everyone in the sector. However, the debate has got to move on from civil society versus industry. Hopefully once on the index, companies will feel the need to stay on it, their performance in these areas will need to be more predictable and that means that the criteria to act ethically can be strengthened.”

At the end of the day FTSE is a company that services the investment community and there is a limit to what FTSE can do to bring companies and NGOs together on this issue.

However Harris has high hopes for the future: “I’d love to see something similar to the Ethical Trading Initiative for the BMS market come out of this - where NGOs and industry work together and collectively decide on a verification process for their members.”

Harris maintains you can compare the situation to the fashion industry 15 years ago when it was beleaguered by supply chain labour standards and sweat shops.

“Progress was made once NGOs and retailers and fashion brands began talking and working together through such platforms as the ETI,” he explains.

Investor interest
Dominic Schofield says the FTSE4Good Index is an exploration; an alternative to a system, that has “provided a new opportunity for engagement”.

“It’s a huge contribution to create an environment where advances can be made in nutrition. From Gain’s perspective, not only does it raise industry standards but it raises the sector in the investor’s sights. It helps investors understand this dimension which is particularly important with the rise of interest in social impact investment.”

The index is “a pathway to transformation,” he says. “It’s one more tool in the kit and while not the be-all and end-all. It is the lever to change.”